shareholders' agreement

  

Definition

Contract between the owners (shareholders) of a firm, defining their mutual obligations, privileges, protections, and rights, and usually comprising the firm's articles of association or bylaws. Although a properly constituted shareholders' agreement protects all signatories, its provisions typically are more important to minority shareholders (holding less than 50 percent of the voting shares), such as those which stipulate the power of minority shareholders to (1) demand internal accounts for inspection, (2) force the firm to pay a dividend if there are profits, (3) sell their shares to other shareholders at a fair market value (FMV), (4) formula or method of determining FMV, and (5) method of settling disputes over FMV. It ensures that there is a market for the shares of a shareholder whose association with the firm is terminated for whatever reason, and safeguards the interests of the continuing shareholders from the possibility of outsiders taking control of the firm.

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